Values Supervisory & Management Boards

26.04.2003

Corporate governance has joined the bevy of buzzwords such as transparency, shareholder activism and financial probity, in the emerging business lexicon. They come in handy, for those that wish to pontificate and hit the high moral ground, citing wayward corporations with highly visible but low-intensity lapses such as that of ABB or those contributing to total collapse such as Enron's.

Ultimately corporate governance is nothing more than good old ethos of ethical supervision and management of corporations in all its manifestations. Half the problem in any actions or inaction is whether they stand up to scrutiny as affecting any stakeholder, anywhere along the way. If you stay on the right path, using old-fashioned corporate best practices and good acceptable behaviour, you can hardly do better. But of course much work has been done in codifying all these, so that you have some standards and some benchmarks to aspire for and measured against. However, although all management and supervision of businesses tend to fall largely in the realm of science, at the end of it all, it is an art and a flourish / commitment that separates the wheat from the chaff.

It is in this context that the corporate community in this part of the world, would well do to consider the European model of having a management board and a supervisory board; as opposed to clinging solely to the legacy system or the Anglo-American approach of the BoD. Earlier the Chairman and CEO were one and the same but soon there was the separation of these roles and then came executive directors who sit on both ends.

The British corporate history goes back to the contractual laws. The former British colonies and administered territories adopted the corporate model willy-nilly. Europe, on the other hand, introduced an apex Supervisory Board, quite distinct from a Management Board. One clear benefit that resulted was that accountabilities became very clear when Managements managed and the supervisory boards supervised.

The two objectives are distinctly different and commingling them made it a heady cocktail in some respects. For instance, a board in which the managing director also sits on, makes it somewhat of a fudge. There is no doubt, nothing wrong with a fudge per se! It suits the tastes of many. But compared to the European structure, where the supervisory board could be regarded as the icing on the cake, what with the cake itself being baked by the management board, a fudge may be plain and simple.

One way to ensure this is to make sure that there are some directors elected by the shareholders and others appointed by independent bodies such as the SEC, SEBI or other regulators; drawn from a panel of say some twenty names recommended by a company's management. These choices specifically represent talents in certain areas such as audit, compliance, finance, MIS or legal backgrounds. Or those with strong managerial background and who have over the years, accumulated years of experience and wisdom and / or retired from active and prominent management positions in major corporations. These individuals will be similar to those that qualify for the House of Lords and the House of Commons in the political equivalent.

In such a scenario, say dwelling on a detail, the annual budgets need not be approved by the Supervisory Board. They should be prepared and approved by the Management Board. But the supervisory board can set profitability targets on behalf of the shareholders and guidelines in terms of expenditure etc. They can also approve certain policies and procedures and through special sub-committees such as the Board Compensation Committee, Audit Committee, Strategy and Policy Committee etc. review carefully the issues and performance of the company in these domains and require the Management Board, to delve deeper in detail and revert to it in its synopsis / summary on the 'flagged' matters.

Independent or non-executive directors add value only when they command certain respect and authority. That authority should flow directly from the shareholders and not from the management of a company. If they feel beholden to the management even remotely or in terms of simple matters, such as fixing the directors' sitting fees etc. or for recommendations on wishing to be nominated on boards or the supervisory boards of subsidiary entities, then there could be a temptation to toe the line of least resistance vis-ŕ-vis the management.

It is providing robust independent challenge that should be the raison d'etre of the supervisory board; who on the other hand, should not resort to any micro-management or take a 'hands-on' approach in the affairs of the Company. They can and should call for information, reports etc. to ensure that there is sufficient pressure on the management to perform and acquit themselves well year after year. Reward and remuneration committees can tone up these into a tangible performance management framework.

In many parts of the world, depending on the individuals and their personalities, sometimes, the chairmen of corporations or certain directors allocate to themselves complete authority / power and proceed to issue diktats that can then undermine the Management Board and dilute the latter's accountabilities and responsibilities. For a wholesome, healthy corporate culture to develop, it is essential that the chairmen of the management boards are hands-on, look at details and are efficient in execution of the policies authorized by the supervisory board. The chairman of the supervisory board on the other hand, can represent the company to the shareholders and to the rest of the world and is often seen to operate in a more strategic manner. Ultimately, only when the two boards are working in tandem, can they deliver results, be it in terms of the quality of corporate governance or financially superior performance.

They need not necessarily become the most admired companies of the world but an accolade as the most respected company in a region and whose credibility and quality are unimpeachable, is worth striving for. That would be the ultimate test of good corporate governance i.e. if this creed is practised consistently, year after year and best practices adhered to; as they begin to apply. The boards of directors, whether it is in management and supervisory style, are really the means to achieve the ends. If the ends are ethical and efficient organizations, then that objective will have the support and understanding of its shareholders, with whom communication should be frequent and honest. Then they would not find it remiss, that a company has serious challenges at some time or the other and that it is doing the best it can during such difficult times. The shareholders will be kind and the main stakeholders including the employees or creditors, the governments and the regulators will hold up such entities in high esteem irrespective of any short-term market set back. Indeed they will commend and recommend such entities as an example for others to follow.

The author is a CMO (EFS) and General Manager in Emirates Bank. The views expressed in this article are not necessarily shared by the Bank.

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